Direct and indirect costs of holding inventory include the following:

1. Acquisition costs

2. Holding costs (carrying costs) are the costs associated with the storage and handling of physical

stock. There are two different types of holding costs:

a. Costs related to the value of the goods: financial costs (i.e. the interest on the working capital tied

up in inventory, which may be the bank borrowing rate or the company's target for return on capital);

cost of insurance; losses due to product deterioration; losses due to obsolescence and redundancy of

inventory; losses due to theft, accidental damage etc.

b. Costs related to the physical characteristics of the inventory include the following: storage space;

power, heat and lighting of the store; movement equipment; labour costs; administration costs.

3. Costs of stockouts

Reference: CIPS study guide page 100-101

LO 2, AC 2.2